Insider Trading, Stock Return Volatility, and the Option Market's Pricing of the Information Content of Insider Trading

35 Pages Posted: 16 Dec 2016

See all articles by Chin-Han Chiang

Chin-Han Chiang

Independent

Sung Gon Chung

Wayne State University

Henock Louis

Pennsylvania State University - Smeal College of Business

Date Written: September 2016

Abstract

We find strong evidence that net insider selling is positively associated with future stock return volatility, consistent with insider selling increasing outside investors’ uncertainty. The positive effect of net insider selling is significantly stronger when the volatility is measured around the earnings announcement. Apparently, option prices do not fully reflect the information content of insider trading for future volatility. More specifically, we find no evidence that option traders adjust the implied volatility for the insider trading effect in a timely manner. Consequently, net insider selling is significantly associated with future option straddle returns and delta neutral returns.

Suggested Citation

Chiang, Chin-Han and Chung, Sung Gon and Louis, Henock, Insider Trading, Stock Return Volatility, and the Option Market's Pricing of the Information Content of Insider Trading (September 2016). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2884261

Chin-Han Chiang

Independent

No Address Available

Sung Gon Chung (Contact Author)

Wayne State University ( email )

5229 Cass
112 Rands House
Detroit, MI 48202
United States

Henock Louis

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802-3306
United States
814-865-4160 (Phone)
814-863-8393 (Fax)

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